Growing and reducing the workforce

The workforce is the group of people a business employs. Its size can change when a business changes its aims, because different objectives need different amounts of labour.

Growing the workforce

A business with a growth objective may need more employees to produce extra output or serve more customers. For example, a small chain of bike repair workshops that aims to open two new sites needs more mechanics and reception staff. A larger workforce can raise output, but it also increases recruitment costs, such as advertising and interviewing, and training costs, such as teaching new staff safe working practices. These costs may reduce short-term profit even when sales are rising.

Reducing the workforce

A business focusing on survival or cost-cutting may shrink its workforce to reduce wage costs. This can happen when demand falls or when technology replaces employees. If demand falls, cash flowing into the business drops, so paying every wage becomes harder. Reducing staff can protect cash and prevent failure.

A smaller workforce can raise productivity (output per worker) if the same output is produced by fewer staff, or if machines replace people and work faster. For instance, a booking company that installs an automated system may need fewer phone staff while still handling the same number of bookings.

However, cutting jobs can create redundancy costs (payments to staff who lose their jobs), lower morale among remaining employees and lose skills that took years to build. A business must weigh lower wage costs against these drawbacks before deciding whether to grow or reduce its workforce.